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Sovereignty and taxation - By S. Akbar Zaidi - Friday 10th June 2011

THE biggest cheer which the new budget and what constitutes the government’s economic policy has brought is that there will be no new taxes in the next fiscal year.
One can understand why representatives in parliament and the elite and growing middle classes would welcome such an extraordinarily short-sighted and disastrous move: no one wants to tax themselves and voluntarily give up their income or
wealth, howsoever it may have been accumulated and earned.
However, by ignoring Pakistan’s core and chronic development problem — a shortfall in revenue — our elected representatives have done a great disservice to us, and continue to compromise Pakistan’s developmental prospects, as well as that ill-defined, increasingly sacred, though hollow, word so bandied about in parliament, ‘sovereignty’.
Sovereignty is not about foreign militaries transgressing borders arbitrarily drawn on a map, but the ability to identify and resolve issues and problems which affect the people of a country. In today’s world, unlike the 18th, 19th or even the 20th century, sovereign nations are not necessarily military powers; they are economic powers. Japan and Germany come to mind.
Both have US troops based there and are part of military alliances and pacts, but no one questions their claim as sovereign powers. Additionally, sovereignty is not simply about economic wealth — pace Saudi Arabia — but about the ability, desire and responsibility to take unpopular and difficult, though necessary, decisions. All aspirations to be a sovereign nation must at least be based on this premise, and the ability to meet one’s needs based on one’s own resources must be central to this understanding.
A few numbers about taxation will emphasise the point about the atrocious state of revenue collection. The tax-to-GDP ratio fell from an already low 11.4 per cent in 2003, to 9.5 per cent in 2009 despite the fact that the economy grew by almost six per cent per annum, and has fallen further to 9.1 per cent this fiscal year.
The finance minister in his budget speech last week, stated that the target for next year would not be much higher than this based on the fact that only 1.5 million of Pakistan’s registered 2.8 million income-tax payers have filed their returns this year.
This means that the proportion of those paying income tax this year is way less than one per cent of Pakistan’s population.
Since the taxable income level is a mere Rs25,000 this fiscal year, it is clear that many millions of Pakistan who can pay their taxes are not doing so. This is not simply because of tax evasion or ‘corruption’, but also because of parliamentary legislation which exempts certain sectors. Rough estimates suggest that at least five to six million Pakistanis, if not more, earn more than Rs25,000 a month. Clearly, there is a major problem regarding the country’s revenue and taxation structure to which
everyone, including the finance minister, agrees.
What is quite astonishing then is in his budget speech the finance minister decided to raise the taxable income to almost Rs30,000 per month which means that the number of registered income-tax payers will fall further. Despite the inflationary adjustment, there is no sense in this extremely illogical and irrational move, especially when there is some recognition regarding the scale of the problem. Rather than get more people to pay their taxes, parliament made sure that fewer will do so — ‘many lakhs’ fewer, as the finance minister gleefully stated in his speech.
While attempts are being made to perennially reform the Federal Board of Revenue (FBR) and to address leakages in the existing tax system, the FBR acknowledges that 79 per cent of revenue goes uncollected, a figure which translates to around Rs1,200bn. Even within the existing taxation system, the entire debt repayment for this year (Rs700bn) could be met if all taxes were collected, with Rs500bn still left over. But clearly, this is not going to happen. Importantly, this means taking more money from some who are already paying their taxes. While attempts at reform are worth pursuing, it is more important to bring in many more among the rich and elite, those who ostentatiously flaunt their wealth because they do not have to (or opt not to) pay any taxes.
The easy, though shamefully discriminatory, manner to raise revenue is to raise it through any form of indirect taxation. The Reformed General Sales Tax is a regressive and unfair tax for as long as most of the rich avoid taxes. Once the number of taxpayers is doubled, one could consider raising revenue from indirect taxes. Until then, it is the less well-off who subsidise the rich by being further taxed on consumption and indirect taxes. Tax policy should be as simple as possible, and there can be nothing simpler than treating all income in the same light regardless of the nature of activity or source of income, and taxing all incomes in a manner where the more you earn, the more taxes you pay.
The full-page Government of Pakistan advertisements about the highlights of the 2011-12 budget in all newspapers is a shameful waste of already limited public resources. It celebrates the fact that the government has not imposed any new taxes.
While parliament may pass any number of resolutions about its sovereignty being trampled upon, until it gets its direct/income tax mechanism in shape, it will remain a non-sovereign, subservient, inconsequential and puny actor, dependent on handouts and subject to conditionalities, making a lot of noise but signifying nothing. Before someone says ‘sovereignty’ again in parliament, someone should turn around and say: ‘taxation first’.
The writer is a political economist.